Nearly all businesses possess trade secrets, yet these forms of intellectual property are often undervalued and overlooked by their owners. This is not least the case in the service sector where the relative value of trade secrets as intangible assets can be extremely high. For example, a logistics firm may not hold any patents, and own just a few trademarks and substantial copyrights, but the value of its operations could heavily derive from information contained within client lists and standard procedures. 

China, like most other countries, provides a legal framework for the protection for trade secrets, and the law provides for remedies in the event that your trade secrets are unlawfully disclosed. Part one of this article by the China IPR SME Centre describes what constitutes a trade secret and outlines the measures you can take to protect them.

Trade secrets have an advantage over other forms of IP rights, such as patents and copyrights which have a finite term—an invention patent typically expires after 20 years. Theoretically trade secrets enjoy an infinite term of protection so long as they remain just that—a secret. The main difference between patents and trade secrets is that technical information is publicly disclosed in patents, whereas it is kept away from the public eye in trade secrets.

The disadvantage of trade secrets is that once the information they contain becomes public, it no longer enjoys any legal protection. Therefore, prevention is the golden rule when it comes to protecting your trade secrets. Once your secret is out there is usually very little that you can do about it.

Know your secrets

You can only protect trade secrets when you know you have them. But what exactly constitutes a trade secret? In China a trade secret is defined as “any non-public information with actual or potential commercial value and that is guarded by confidentiality measures”. Thus, in order for the information to be a trade secret, it must.

• be non-public: it must not be known by the general public or by your competitors;
• have actual or potential commercial value: it must give the owner a competitive advantage or be capable of generating economic benefit; and
• be guarded by confidentiality measures: the owner must take reasonable measures to protect the confidentiality of the information.

All three elements are essential pieces of the puzzle.

If you are still unsure whether you have trade secrets, a good rule of thumb is to consider whether the information is something your competitors would want to know or would give them a commercial advantage. Your trade secrets may include:

• expressions of ideas that give your business a competitive advantage, e.g. a new type of service, an innovative business model, or a new online concept;
• the status of products or services under development, expected product release dates and details of how they function and their technical features, e.g. new design features or how a new software program works;
• valuable business information, such as customer lists, cost and price information, suppliers and contractors, contract terms, marketing strategy and plans; and
• any other information with potential commercial value, such as your rankings of quality of suppliers or creditworthiness of customers.

If you have not already done so, it is important to catalogue what trade secrets you may have, rank them in terms of importance and value and remember to periodically update your catalogue as your business grows.

Keep it secret, keep it safe

Once trade secrets become public, they can no longer be protected. They can be disclosed via: publication; disclosure of information during seminars or conferences; negotiations and other business dealings with third parties without a non-disclosure agreement; misdirected emails or other correspondence; and casual conversations.

As it is not always possible to keep trade secrets locked away (they may be the knowledge of one or more employees), keeping them safe involves using a combination of physical, technical,and contractual barriers, and implementing a trade secrets protection policy.

Physical barriers may include simply marking documents ‘CONFIDENTIAL’, keeping sensitive documents in a safe, undisclosed location, and locking files away after business hours. In addition, access to areas where sensitive business documents are stored should be restricted to certain employees. Limit access and copying rights to the personnel who actually need it. All visitors should be logged, required to sign a non-disclosure agreement before being granted access to sensitive areas of your premises and should not be left unattended.

Technical barriers require the use of information technology (IT) to protect trade secrets stored in electronic files on your computers or servers. The basic rule in IT security is that the more valuable the information, the more expensive and more difficult it is to protect. Consulting an IT security specialist can help you to design a cost-effective IT security system. However, even simple, inexpensive means of IT security measures can be used, such as employing the proper use of passwords, commercially available encryption, and logging features.

In addition, it is important to have a written technology policy in place and to ensure that your employees abide by it. For example, as it is extremely easy for your employees to email sensitive documents to third parties or to transfer files using recordable media, you might want to consider restricting the ability of your employees to use these tools. Your employees in China should be given a copy of your technology policy, written in both English and Chinese (possibly as an appendix to their employment contract), and be required to sign an agreement stating they received and understand the policy.

Contractual barriers normally involve the use of non-disclosure or confidentiality agreements, and are generally considered as one of the best ways to protect your trade secrets. Every existing employee and all new employees should be required to sign an employment contract with non-disclosure or confidentiality provisions. For employees in China, the contract should be in both English and Chinese to ensure obligations are clearly understood by the employee. Such agreements should also be entered into with suppliers, subcontractors and business partners who are given any level of access to your trade secrets.

Be sure to document the trade secrets protection measures you take and ensure your trade secrets protection policy is written down. It is also essential to maintain sufficient records of the flow of information in and out of your company, including keeping records of meetings, discussions, emails, written correspondence and the transfer of electronic files so that you can conduct an investigation and assemble evidence if you suspect your trade secrets have been misappropriated.

Finally, be vigilant when implementing your trade secrets protection policy. Trade secrets are a two-way street—your staff must be told not only to protect your trade secrets, but also not to obtain or utilise the trade secrets of others. Designating a person to be in charge of ensuring compliance with your trade secrets protection policy may be a useful option to consider.

Take-away Messages

• Prevention is the key to protection: More often than not, once a trade secret is disclosed it is very difficult to recover its value, even if you succeed in litigation.
• Establish an internal management system for trade secrets: Training and clear written guidelines are essential. It is important to educate your employees on what can or cannot be disclosed. Adopt appropriate measures to mark and store confidential documents whether they are in hard or soft format.
• Require all employees to sign an employment agreement with strict confidentiality provisions: To win a theft of trade secrets claim in China, you must show that the information stolen: (1) is not publicly known; (2) has commercial value; and (3) had concrete measures taken to keep it secret.

In the second part of this article we will address managing employees’ access to intellectual property, dealing with third parties and what to do when your secret is out.

The China IPR SME Helpdesk is a European Commission funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of intellectual property rights in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, e-mail your questions to: question@china-iprhelpdesk.eu. You will receive a reply from one of the Helpdesk experts within seven working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.